North Carolina Business Litigation Report

Lien Waiver Can Subordinate Materialman's Whole Claim to Lender

It's not often that the Business Court is called upon to address matters of construction law.  Yesterday, though, the Court held that a general contractor's lien waiver constituted a waiver both as to the amount and the priority of the contractor's claims.

In Wachovia Bank, N.A. v. Superior Construction Corp., Wachovia was the construction lender and Superior was the general contractor on "The Preserve," a condominium development in Brunswick County that was owned by Intercoastal Living, LLC, now in receivership.  The project was only partially completed, and litigation ensued.  (A number of lawsuits were filed against Superior and Intercoastal, many of which were designated to Judge Jolly as exceptional cases.  The Wachovia case, however, was designated by the Chief Justice as a complex business case).

Under North Carolina's materialman's lien statutes, including N.C.G.S. § 44A-10, a claim of lien relates back to the first furnishing of labor or materials at the site of the improvement.  Such a lien takes priority over encumbrances arising after that "first furnished" date.

Based on the allegations of the complaint, Superior first furnished labor and materials to the site approximately one month before Wachovia obtained a promissory note and deed of trust for over $22 million.  Under the lien statutes and absent any other facts, Superior would have been in good shape.

There were other facts, though:  During the course of construction, Wachovia, like most construction lenders, required Superior to execute lien waivers in order to obtain interim payments.  Superior executed two such lien waivers in connection with payment applications totaling over $850,000.

Wachovia filed a declaratory judgment action, then was substituted out as plaintiff.  Fortunately for the new plaintiff, Wachovia attached the lien waivers to its complaint, which allowed the new plaintiff to move for judgment on the pleadings under Rule 12(c) on the basis of those waivers.

Judge Jolly determined that the pleadings "clearly establish that Defendant Superior executed the Waivers in exchange for consideration from Wachovia."  The question for the Court was the scope of those waivers.

Superior and its bonding company argued that, although a lien waiver reduces the amount that may be claimed in a subsequent lien proceeding, such a waiver cannot alter the date to which a lien relates back.  The Court rejected that argument:

If a party chooses lawfully to change its position on a hierarchy of liens, by contractual waiver or otherwise, the party still remains certain and secure of its new position. While making such a business agreement may not be wise in hindsight, the law does not prevent the parties from doing so.

The Court also ruled that N.C.G.S. § 44A-12, which prohibits lien waivers "made 'in anticipation of and in consideration for the awarding of a contract . . . for the making of an improvement upon real property,'" was not implicated by the lien waivers at issue.  

 

Full Opinion

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Mack Sperling
Brooks Pierce, LLP
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